Lesson 12: Real Accounting Fraud

It begins by talking about the Enron bankruptcy. The source for this article is called the Free Market. It’s published monthly by the von Mises Institute in Auburn Alabama.

“If the Enron Bankruptcy proves anything it is that there are sinners in all walks of life and that the market economy provides mechanisms for rooting out and punishing systematic liars.” Now here’s one thing that is important here. A lot of people might have listened to my previous lectures defending capitalism and they’ve been thinking: “Well what does Nash and capitalism have to say about those bums, those crooks at Enron?” Well you just heard a colleague of mine tell you that “If the Enron Bankruptcy proves anything it is that there are sinners in all walks of life and that the market economy provides mechanisms for rooting those sinners out and punishing systematic liars.”

Capitalism can take care of itself.

“Those who clamor for Congress to do something”, Democrat, or foolish Republicans. “Those who clamor for Congress to “do something” to assure that this kind of thing will never happen again are delusional if they think Congress has the ability to legislate away sin or otherwise improve on the market system of profit and loss. Such delusions are a testament to the successful brainwashing of generations of public school students who have been taught to worship the “god” of the state and to look to it to solve all of life’s problems.” I’d say our course so far has prepared you for that sentence.

Let’s keep reading: “Accounting fraud at Enron is such a big story because it is so exceptional; only once in a blue moon does a major corporation destroy itself in this way.” Enron committed suicide! “In contrast, “accounting” fraud is an inherent feature of government.” It isn’t businesses that usually engage in government fraud. It is government that does it.

Let’s keep reading. I like this! “There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, there only budgets.” I laugh. I read this stuff for years and then I forget how easy it is to understand the truth. You don’t have profit and loss statements. You only have budgets. And budgets don’t mean a thing!

“Consequently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it. All we knew is that the budget grew by a certain amount, for some ostensible purpose. And government is constantly lying to the public about how much of the public’s money is being spent and what it is being spent on.”

“As Gene Epstein has reported in Barron’s, during the Clinton administration, vast sums were transferred from the Social Security and Federal Highway Trust Funds to the budget so that Clinton and the Republican Congress could take “credit” for balancing the budget. Any corporate CEO who raided his employees’ pension fund and put the money in the company coffers so that the bottom line would look good and he could earn himself a fat bonus would end up in prison.”

“The federal government practices what it calls “baseline budgeting,” whereby federal agencies announce that they wish to increase their budgets by, say, 10 percent a year, and if they only increase them by 5 percent that is called a 5 percent budget “cut.” There can be no better example of accounting fraud than calling a budget increase a cut.”

“The General Accounting Office, Congressional Budget Office, and other federal agencies also use “static analysis” when analyzing and reporting to the public on tax policy changes. That is, they assume that taxation has no effect whatsoever on economic behavior. So, if we have a $10 trillion economy, and impose a flat 75-percent income tax, these “authoritative” sources will announce that the IRS expects to collect $7.5 trillion in revenues, each year, ignoring several hundred years of economic theory and practice. “

In other words, you have a 75% marginal income tax rate and people are going to change their behavior. Some of them are going to kill themselves. Others are going to move to find a non-socialist county in the world. They might even move to Cuba, because even Cuba wouldn’t do that.

“Perhaps the biggest accounting scam perpetrated by the state has to do with various governmental “off-budget enterprises.” As James Bennett and I wrote in our 1983 book, Underground Government: The Off-Budget Public Sector, for well over a century federal, state, and local governments have responded to citizen demands for tax, expenditure, and borrowing restraint by paying lip service to the demands while at the same time setting up the subterfuge of off-the-books government enterprises.“

“At the state and local levels of government, there are thousands of government boards, “authorities,” special districts, and other entities that issue non-voter-approved revenue bonds for everything from dormitory construction to small business loans. Taxpayers never get to vote on the issuance of this debt; the expenditures of these entities do not appear on governmental budgets; and their activities are largely shielded from the public.”

“Consequently, they are responsible for some of the most spectacular bankruptcies in state and local government history, such as the $2.5 billion default of the Washington [state] Public Power Supply System (“Whoops”) in 1983 and the near bankruptcy of New York, both city and state, in the 1970s.”

If anyone is interested in the rest of this great article by Mr. DiLorenzo it is in the journal Free Market of April 2002.

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Quotations in this lecture are from “Real Accounting Fraud” by Thomas J. DiLorenzo

The Free Market; April 2002; Volume 20, Number 4 – Published by The Mises Institute

This attribution meets the requirements of the Creative Commons License

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http://mises.org/freemarket_detail.aspx?control=395

April 2002; Volume 20, Number 4

Real Accounting Fraud

by Thomas J. DiLorenzo

If the Enron bankruptcy proves anything, it is that there are sinners in all walks of life, and that the market economy provides mechanisms for rooting out and punishing systematic liars. Those who clamor for Congress to “do something” to assure that this kind of thing will never happen again are delusional if they think Congress has the ability to legislate away sin or otherwise improve on the market system of profit and loss. Such delusions are a testament to the successful brainwashing of generations of public school students who have been taught to worship the “god” of the state and to look to it to solve all of life’s problems.

Accounting fraud at Enron is such a big story because it is so exceptional; only once in a blue moon does a major corporation destroy itself in this way. In contrast, “accounting” fraud is an inherent feature of government.

There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, only budgets. Consequently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it. All we know is that the budget grew by a certain amount, for some ostensible purpose. And government is constantly lying to the public about how much of the public’s money is being spent and what it is being spent on.

As Gene Epstein has reported in Barron’s, during the Clinton administration, vast sums were transferred from the Social Security and Federal Highway Trust Funds to the budget so that Clinton and the Republican Congress could take “credit” for balancing the budget. Any corporate CEO who raided his employees’ pension fund and put the money in the company coffers so that the bottom line would look good and he could earn himself a fat bonus would end up in prison.

The federal government practices what it calls “baseline budgeting,” whereby federal agencies announce that they wish to increase their budgets by, say, 10 percent a year, and if they only increase them by 5 percent that is called a 5 percent budget “cut.” There can be no better example of accounting fraud than calling a budget increase a cut.

The General Accounting Office, Congressional Budget Office, and other federal agencies also use “static analysis” when analyzing and reporting to the public on tax policy changes. That is, they assume that taxation has no effect whatsoever on economic behavior. So, if we have a $10 trillion economy, and impose a flat 75-percent income tax, these “authoritative” sources will announce that the IRS expects to collect $7.5 trillion in revenues, each year, ignoring several hundred years of economic theory and practice.

Perhaps the biggest accounting scam perpetrated by the state has to do with various governmental “off-budget enterprises.” As James Bennett and I wrote in our 1983 book, Underground Government: The Off-Budget Public Sector, for well over a century federal, state, and local governments have responded to citizen demands for tax, expenditure, and borrowing restraint by paying lip service to the demands while at the same time setting up the subterfuge of off-the-books government enterprises.

At the state and local levels of government, there are thousands of government boards, “authorities,” special districts, and other entities that issue non-voter-approved revenue bonds for everything from dormitory construction to small business loans. Taxpayers never get to vote on the issuance of this debt; the expenditures of these entities do not appear on governmental budgets; and their activities are largely shielded from the public.

Consequently, they are responsible for some of the most spectacular bankruptcies in state and local government history, such as the $2.5 billion default of the Washington [state] Public Power Supply System (“Whoops”) in 1983 and the near bankruptcy of New York, both city and state, in the 1970s.

At the federal level of government there is a shady operation known as the Federal Financing Bank (FFB), which operates out of a small room in the US Treasury Department. With the help of the Treasury’s printing presses, the FFB loans money to federal agencies but the loans do not appear on the budget lines of the agencies as increased spending. When the agencies pay back the loans (if they ever do), federal government “accountants” make it a point to count it as a reduction in spending. Thus, even though the existence of the FFB causes an increase in federal spending, what gets reported in the federal budget is a decrease in spending.

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Lesson 12: Real Accounting Fraud